Slow & Steady Wealth Building: A Case for Holding Long Term Rentals

Thomas Fowell Buxton once said, “The road to success is not to be run upon by seven-leagued boots. Step by step, little by little, bit by bit — that is the way to wealth, that is the way to wisdom, that is the way to glory.” I believe this applies to owning rental property as well. It is not a get-rich-overnight scheme. It takes educated investing and persistence to accrue wealth as a buy and hold real estate investor. However, when you analyze the numbers, the longer that properties are owned, the more likely you are to accumulate wealth.

Have you ever met somebody who has owned a portfolio of rentals over years and years? Chances are, if you are a real estate investor, you’ve rubbed shoulders with other men and women in the industry who have consistently owned and rented properties. How many of them were hurting for income? Probably none of them. The reality is that the type of person who has the resolve to build a portfolio of rental properties is typically wealthy. Let’s take a look at why this is.

Download Your FREE copy of ‘How to Rent Your House!’

Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at BiggerPockets have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.

Principal Pay Down Accelerates the Longer You Pay on a Loan

Perhaps most of you realize this, but I still feel like it is often overlooked when running a pro forma. The amortization schedule of a mortgage is structured so that the principal portion of the mortgage payment increases every year as you get closer to maturity.

For example, a $100,000 purchase with 25% down payment would be a $25,000 down payment and a $75,000 loan. In the first year of your loan, you will only have paid $1,180 towards principal (meaning your loan balance would be reduced by that much). However, every year that passes, the principal portion of the loan payment will increase. By the tenth year of the mortgage, the yearly principal portion of the mortgage has increased to $1,849. By year 20 it jumps to $3,046, and by the last year of the mortgage, almost all of your payment is going towards principal pay down.

For investors who hold properties for the long term, you can see how mortgages that have seasoned for many years begin to accrue equity at an accelerated pace the closer you get to loan maturity.

Even at a Constant Rate of Appreciation, Equity Accumulation Grows at an Increasing Rate

Equity (attributed to principal pay down) increases at an accelerated rate because of the way amortization works (as discussed above), but equity also increases at an accelerated rate because of appreciation. Now, some will argue that you shouldn’t bank on appreciation when buying property, but I simply disagree. If you look at long term trends, property always has and always will increase in value. Yes, there are dips and market cycles, but over the long term, property general appreciates.

For the sake of this argument, let’s say that the market you are buying in has seen a 3% appreciation rate over the long term. Even at a constant rate of appreciation, your yearly value increases are not constant, they are steadily increasing. For example, if you buy a $100,000 property and it appreciates 3% in the first year, your property will be worth $103,000 in the second year (an increase of $3,000). However, in the second year, that 3% appreciation applies to $103,000 now which would equal an increase of $3,090. More than the value increase in the first year. By year ten, the property is worth $130,477.30, and in that year the property increased in value by $3,914 (compared to only $3,000 in the first year).

Again, when you see this principal play out over 20 and 30 years, the equity accumulation becomes much more dramatic. By year 20, the property is worth $175,351, and by year 30 the property is worth $235,657. Interestingly, by the last year, your property has appreciated over $7,000 in just one year.

I realize these types of numbers can make your head spin. The basic gist of this argument is that the longer you hold a property and pay down a mortgage, the faster the rate of your equity accumulation. It takes patience and persistence, but as you see above, things really start to pick up by year 20. You start clipping away at large chunks of principal, and the property you bought 20 years ago is worth a lot more than what you originally paid for it.

For those of you in your 20s and 30s, building a portfolio of rental properties now can truly become your retirement. For those who are a little older, these same principles can be applied to shorter term loans (i.e. 10 and 15 year amortization schedules).

How about you? Are you disciplining yourself to buy properties now that can be held for massive equity (wealth) accumulation over the long term?

Leave a comment, and let’s talk!

Free eBook from BiggerPockets!

Join BiggerPockets and get The Ultimate Beginner's Guide to Real
Estate Investing for FREE - read by more than 100,000 people -
AND get exclusive real estate investing tips, tricks, and techniques
delivered straight to your inbox twice weekly!

About Author

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market.
Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.

20 Comments

I’ve owned rental properties since 1998. I’ve accumulated properties in several states. I started this when my first son was born. I bought him a home in an out of state market with a 30 year note. Within 2 years I re-fi’d it into a 15 year note so it would be paid off by the time he was going to college – which is in 1-1/2 years. I did the same thing for my other two children as well. Thusfar other people’s money is going to pay for my children’s college education. I learned this strategy from Warren Buffet in one of the many books about him.

Currently I managed many properties in several states and I discuss this strategy with every client I know. I also have several really powerful tax strategies which I learned from being a real estate attorney.

The reason people say not to account for appreciation is because the minimum appreciation in your example would be neutralized by inflation no matter what cycle the economy is in. One could argue that inflation is less than 3% but I bet if you accounted for the cost of food and energy, it would be much higher then the 3%.

I definitely disagree with the assertion that appreciation can be ignored because it will be wiped out by inflation. If you pay cash for a house and the house appreciates at the exact same pace as inflation – okay, so you kept up with inflation (still better than a lot of other investment vehicles. BUT, if you use leverage on the property – the entire property appreciates rather than the money you’ve invested. Combining leverage with appreciation FAR outweighs the negative impacts of inflation.

I agree with Ken about combining leverage with appreciation, especially in this low interest rate environment. Over time with inflation, each remaining dollar in the mortgage owed to the lender becomes less valuable while the investment property generally becomes more valuable.

Never brought up the leverage versus all cash argument. If I did we would be in agreement. What I am saying is don’t buy a rental where the numbers need appreciation to make it an investment. Using leverage is better then paying all cash. The cash on cash return will be better then properties cap. If your cash on cash return is 3-4% then all you are really getting from the rental is principal pay down at best.

Great way to go. I started buying in my early 20s. My houses cash flowed with 15 year mortgages. I bought in areas that were getting better. As the area improved and rents increased they cash flowed much better. When the cash flow improved, we paid additional principle on the first house. When that first house was paid, we could pay more additional on the second house. Then the payoffs get faster and faster. Now I am adding about a house a year and paying cash. No stress

Gene – you are the EXACT example I was referring to. A disciplined investor who bought strong cash flow properties … and over time you begin to see how wealth accumulation accelerates. The cashflow you can now generate from all of your properties get dumped right back into the portfolio to pay off new houses. – AWESOME!

Great way to think about wealth creation thru real estate. I would just like to point out that the assumed increase of 3% in appreciation is typically only allowing you to keep up with inflation and is not actually adding true wealth. Nevertheless, it is an amazing hedge against it, and it’s hard to beat the amortization, especially if the property is purchased correctly.

I like this story as it reminds me that you don’t need to be an amazing real estate investor with a giant crew of wholesalers generating the best deals and the most best-in-business contractors to make money. Buying and holding real estate with a trained property manager is a great way to NOT give up your day job (you know..some people LIKE their day jobs) but also allow future job security, extra cash on the side and a good retirement. You won’t make as much money as a great flipper or wholesaler (probably), but it’s easier.

Agreed. This is so simple to me but to many its too risky or more work than they want to out in. I’m in a market (Tampa, FL) where I am cashflowing 2 to 1 I.e. 1 months rent can pay the mortgage 2 months AND the properties are appreciating at a rapid pace. My first property was bought for 92,500 last year, we spent 5k doing basic cosmetic,updating. 1 year later Its worth 137k!!! This is an extreme example where everythi,g came together. Previous owner held for 30 years and was ready to just let it go and didn’t want to do any basic work to get it showing it’s best. So we bought it for about 7k under market value and the strategic 6k of updates netted about 20k of,forced equity combined with the strong appreciation due to limited inventory. This was bought off the mls, no wholesaling, no crazy hoops to jump through

And we did cash out refi which dropped our rate 3/4 of a point and gave us the money for the next property. And we only went 75% LTV so we have some cushion should the market downturn or we simply decide to sell and move on.

Great post Ken.
The issue I’m struggling with, is when to sell one of these great buy-and-hold properties, to accelerate wealth building. For example, you have a property you’ve owned for 10 years. You have a low fixed rate (or low adjustable), you’re building equity, the property is appreciating, but if you sold you could buy property at 2x or 3x the current value.

Due to the higher leverage, you probably reduce cash flow and also equity build up in the short term. In the longer term, you accelerate wealth, depending on what you buy of course.

Great blog. One of the best for those that have limited time for real estate deals and really love and would never give up their job.

Long term ” keep the property’ investors eventually see their children leave the house, mortgages being paid off, and most major rental home expenses taken care of over the years. Rent money continues however to come in non stop every month. It accumulates quickly. What do you do with the money, especially if you don’t want to buy any more real estate ? Just relaxing at home in front of the TV is out of the question for any real estate investor used to a lifetime of action, real estate adventures, and problem solving. Any suggestions?

Being a relatively new buy and hold investor who got started later in life, and being one of those who really likes their day job, I appreciate your strategy and have been using it for years to invest in other areas, and now will be doing the same in real estate. My goal is to end up with 5-6 paid off properties in the next 10 years to supplement my retirement form my awesome day job. Just closed two weeks ago on #1 so we are under way!

Tom …….You plan sounds great. However the addiction factor takes over. You see a great house with great potential for a rental, and can get it at a great price. Soon the 5-6 six house plan finds you owning 20. You say ” no more house investments.” Then a super bargain comes along and its 21.